Telefonica SA

Good morning, thank you for standing by and welcome to Telefónica's January-December 2024 results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. If you'd like to ask a question, please press star followed by 1 1 on your telephone keypad. You will then hear an automated message advising your hand is raised. To answer your question, please press star 1 1 again. We will kindly ask you to ask a maximum of two questions per participant. As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Adrián Zunzunegui, Global Direction of Investor Relations. Please go ahead, sir.

Good morning and welcome to Telefónica's conference call to discuss January-December 2024 results. I am Adrián Zunzunegui from Investor Relations. Before proceeding, let me mention that the financial information contained in this document has been prepared under international financial reporting standards as adopted by the European Union. This financial information is un-audited. This conference call and webcast, including the Q&A session, may contain forward-looking statements and information relating to the Telefónica group. These statements may include financial or operating forecasts and estimates or statements regarding plans, objectives, and expectations regarding different matters. All forward-looking statements involve risks and uncertainties that could cause the final developments and results to materially differ from those expressed or implied by such statements. We encourage you to review our publicly available disclosure documents filed with the relevant securities market regulators. If you don't have a copy of the relevant press release and the slides, please contact Telefónica's Investor Relations team in Madrid or London. Now let me turn the call over to our Chairman and CEO, Mr. Marc Murta. Good morning, everyone. Let

me start by saying that I am honored to address you in my first earnings call as Chairman and CEO of Telefónica. I have prioritized the conduction of a tour across our operations. I see both significant strengths and opportunities to enhance our execution and our long-term shareholder value creation. Our position in high-quality core markets reflects both our heritage and potential. The market leadership we've achieved in Spain and Brazil, combined with our strategic positions in Germany and the UK, gives us a relevant reach and scale. While we have built strong operational capabilities, I see opportunities to deploy these more effectively across our footprint. I will share with you more when ready, but my vision is to accelerate the performance of this great company, raise the level of ambition, simplify it where prudent, and ultimately drive the corporate valuation higher over time. This year's performance can demonstrate the fundamental strengths of our business model. Despite a dynamic macro environment, we've delivered growth across our key metrics, including free cash flow. Today's rapidly evolving landscape, we must adapt rapidly to capture our full potential. Our strengths, as I see it, rest on three pillars. First, scale customer relevance, with increasing customer satisfaction and growing NPS over a total customer base of 390 million. Second, we are a world-class infrastructure company, leaders in fiber and in copper shutdown in Europe. And third, our strong and proven know-how with senior and experienced management in place. Looking ahead, I believe it is time to elevate our ambition and boost our strategic plan in a new time in Europe. I see opportunities to accelerate execution across our business, from our core connectivity service to our growing B2B technology solution under an industrial rationale. We should further intensify our focus on core markets and activities through and portfolio optimization, whilst maintaining efficient capital allocation. The European telecom industry should move in more Eurocentric decisions. The pace of technological disruption and investment requires demand that we move faster and more decisively with consolidation, driving future growth. Telefonica is uniquely positioned to lead in this evolving landscape, given our operational excellence and technical capabilities, within what I believe to be a more favorable regulatory framework. My immediate focus is on increasing our operational velocity, evaluating all options for shareholder value creation and enhancing speed to market whilst building on Telefonica's strong foundations. We have significant opportunities to drive business performance and accelerate value creation through financial discipline, and with free cash flow as the key metric to focus. You will learn more later this year as I plan to share findings from the strategic reflection and review that we will conduct during the next few months before the year end. I am committed to making Telefonica the best that it can be, controlling what is within our control and more. In the meantime, once we have the right assets and the right knowledge, we will continue executing but with greater speed and decisiveness to deliver. I will now hand over to Angel, who will guide you through Q4 and the financial year 2024 results, as well as the performance of our core operating businesses.

Thank you, Marc. Let me start by highlighting that we have fully delivered within our 2024 guidance ranges across all metrics. Looking at free cash flow, we generated 2.6 billion euro, representing 14% growth year on year, above our more than 10% guide. The momentum in our core markets has been a key driver of these results. We are seeing healthy commercial trends across our core markets with improved customer metrics that validate our strategy. As an example, Spain had full year on year growth in all accesses for the first time since 2018 and the best conversion churn since 2013. Our network deployment continues at pace, but importantly, with industry-leading capital efficiency. While extending our fiber footprint and 5G coverage, we've maintained a capex to revenue ratio of just 12.9%. The successful decommissioning of legacy networks is further enhancing our operational efficiency. These operational achievements have translated into a stronger financial position, with leverage now reduced to below 2.6 times while maintaining strong dividend coverage. So, strong momentum going into 2025. Let me now highlight our key achievements for 2024 which demonstrate substantial progress across three core areas of transformation. Our customer focus strategy delivered strong results for the full year. We grew our base by 2 million customers while further improving our net promoter score. Throughout 2024, our initiatives have significantly enhanced our commercial performance, driving sales efficiency, increasing customer lifetime value, and delivering meaningful churn reduction. In network deployment, we've delivered significant expansion of our next generation infrastructure. We passed an additional 10 million premises with fiber during the year. While extending our 5G coverage by 10 percentage points across core markets. A particular highlight has been our pioneering work in network autonomy, where we're seeing tangible benefits from AI implementation. 2024 was also a year of important operational milestones. Our team successfully progressed with our copper shutdown program in Spain, marking a significant step in our network modernization. At the group level, we continue achieving efficiency gains, particularly in areas like technical customer care. Whilst in ISPAM, we advanced with our portfolio optimization efforts with the filing of an ordinary insolvency procedure in Peru and the sale of our operations in Argentina, following a competitive process that allowed us to optimize proceeds whilst avoiding execution risk. Our performance remains strong, as shown on slide six. Revenue was up .4% in the quarter, reflecting solid commercial momentum across our footprint. Service revenue maintained its trajectory, with B2B continuing to be a growth driver, and B2C showing resilience across our core markets. On profitability, we delivered reliable operating leverage, while maintaining a bit of flat -on-year in Q4. While CAPEX increased .7% in Q4 due to Argentinian effects and some phasing effects, we achieved our full year target with CAPEX to sales below 13%. Most importantly, our free cash flow generation showed strong progression throughout the year, demonstrating the effectiveness of our operating model and natural hedging policy. This performance translated into reduced leverage and improved dividend coverage. I will now guide you through our core operating businesses. Moving to slide seven, Telefonica Spain delivered an excellent performance in 2024, with a leading growth profile based on strong commercial and operational momentum. For the first time since 2018, all main accesses grew -on-year simultaneously. Through a relentless focus on superior assets, customer care, quality offering, and a smart commercial approach, our strategy proved successful amidst changing market dynamics. Moreover, an industry-leading ARPU and the lowest churn in more than a decade resulted into the best combination of KPIs in B2C. Together with our premium IT proposal for B2B and extended wholesale agreements, it makes us the most sustainable player in the Spanish telco space. Commercial success fueled revenue growth of .3% -on-year in Q4. And, as we anticipated, full year EBITDA was back to -on-year growth, driven by improving retail revenue growth and further efficiencies in personnel, network transformation, and digitalization. Meanwhile, EBITDA after leases increased -on-year for a second consecutive quarter. Noteworthy, this operational improvement was achieved whilst bringing down capex, leading to stable EBITDA minus capex compared to the previous year. Telefonica Spain faces 2025 from a stronger and better position to continue capturing growth and further adding operational leverage. On slide 8, Telefonica Brazil continues to build a sustainable future by enhancing the quality of its service mix thanks to steady growth in contract and fiber accesses. During the quarter, revenue increased by close to 8% in local currency, with the fixed line business reaching a new record high and sustained strong performance in mobile. Despite this strong commercial momentum and the higher contribution from digital services, the EBITDA minus capex margin grew -on-year by as much as 0.5 percentage points to 18% in the last quarter of 2024. Finally, the agreement for the migration from concession to authorization was completed, a move that will transform our business and operations. Our German operations on slide 9 maintained their good performance in Q4, with sustained auto-branded build and enhanced B2B momentum, driving strong commercial traction. As for our platforms, Jota Network was recognized for its quality once again, receiving a very good rating from Connect magazine for the fifth consecutive year with the strongest improvement among German MNOs. 5G population coverage expanded further, now exceeding 97%, while O2 contract churns remain declined by .7% -on-year in Q4, impacted by MTR headwinds, tough handset comps, and the shift in the -on-one business model. However, disciplined execution and cost efficiencies supported EBITDA growth of .3% -on-year, with a sequential improvement in operating leverage and further EBITDA margin expansion. Moving to slide 10, where we review our UK operations at VMO2. In Q4, we maintained our strategic focus on expanding our fixed network and enhancing customer value. Our fixed business continued to grow, supported by higher R2, which increased by 2% -on-year. Fiber rollout at a record pace, with 1.3 million premises passed in 2024, expanding our total fiber reach to 6.4 million homes. On the mobile site, contract churn remains at 1.1%, as initiatives such as inclusive U-roaming and the auto-priority loyalty program continue to strengthen customer retention. Additionally, 5G population coverage reached 75%, an improvement of as much as 24% -on-year. From a financial perspective, revenue was flat -on-year in Q4, showing improved momentum, while EBITDA declined, mainly reflecting ongoing investment in IT and digital efficiency programs, B2B fixed headwinds and tough prior year comparisons. Despite this, we achieved 540 million pounds in annualized synergies, delivering on our five-year target nearly 18 months ahead of schedule. Slide 11 reviews the performance of Telefonica Tech, a driving engine for the superior growth of Telefonica's B2B revenue. Telefonica Tech has completed 2024 as a fully integrated tech player, consistently outperforming its market and revenue exceeding the 2 billion euro mark. Revenue growth accelerated in the last quarter to 10% -on-year in 2024, supported by a highly skilled workforce and widely recognized capabilities for delivering advanced IT services for B2B digitalization. Main driver behind this performance is the operating leverage of the new organizational model, which expanded capabilities across the print and allowed us to improve the revenue mix. The larger size and value of the new projects are increasing the weight of professional managed services, which translate into a more recurrent and more profitable revenue flow. Furthermore, the strong sales pipeline with both commercial funnel and bookings growing faster than revenues, further increase revenue visibility, thus the business sustainability increases. Slide 12 Moving to slide 12, Telefonica infra is driving growth and accelerating digital inclusion through the deployment of -the-art next generation infrastructure. We passed 25 million fiber premises by year ending our fiber course, progressing towards our target of 30 million by 2026, approximately 30% of Telefonica Group's future fiber deployment. Slide 13 TelSUSE, our -in-class international connectivity infrastructure, is expanding its international network by adding another new generation subsea cable connecting Puerto Rico and the U.S., expected to grow life in Q3 27, at sustained profitability levels close to 50% in 2024. And the agreement to sell our stake in NavX at attractive multiples is a further successful step in our asset recycling strategy to generate significant gains and unlock value, closing conditional upon receiving regulatory approvals. I will now hand over to Laura, who will give, who will guide you through ISPAN performance and the main financial topics.

Thank you, Ángel. In ISPAN, as we saw in slide 13, we have recently taken relevant steps in the execution of our strategy. Firstly, in Peru, where Telefonica del Peru has filed for the ordinary insolvency procedure, this is the right decision to fulfill a fiduciary duty of protecting Telefonica shareholders' interests. In addition, new limited financing of approximately 390 million euro has been granted to Telefonica del Peru, subject to strict conditions. On top of that, last Monday, we announced the sale of our operations in Argentina for close to 1.2 billion euro as a result of a highly competitive sale process, which has allowed us to optimize the proceeds, significantly exceeding market expectations. This deal will have certain accounting impacts in Q1 2025. Around 1 billion euro FX translation impact that reflects the accumulated evaluations since acquisition back in 1991. It is a non-cast impact, and moreover, it has already been reflected in inequity. This is just a reclassification. But I would like to highlight again how this unconditioned sale, where signing and closing took place simultaneously, allows us to avoid execution risk whilst cashing in close to 1.2 billion euros. We believe these demonstrates our execution focus, taking steps to continue with our portfolio simplification exercise, and their very attractive terms. You should expect from us to continue exploring value creation alternatives to our ESPAN operations. Following with ESPAN, we continue to work towards a more efficient and rational industry by sharing infrastructure and optimizing resources, as shown on slide 14. In Colombia, we announced the integration of Movistar Antigua's mobile access infrastructure into a journey-on company to expand coverage to new locations and offering greater capacity and speed to customers. Our FTTH transformation progresses as planned, and 96 percent of our fixed broadband access are connected through FTTH networks. This is a plus five percentage points year on year. Q4-24 results were impacted by a more favorable comparative base in Q4-23, driving by the depreciation of the Argentinian peso in Q4-23 and the adoption of the new exchange rate in Venezuela. Revenue, EBITDA, and EBITDA increased by 7.8, 3.4, and 2.4 year on year. Moving to our capital structure. Telefónica maintains a robust balance sheet position. As of December 2024, our net financial debt stood at 27.2 billion euro, translating to a net debt to EBITDA ratio of 2.58 times. During this year, net financial debt declined by 0.2 billion euro, and net debt to EBITDA was reduced from 2.60 to 2.58 times, mainly due to the solid precast flow generation which accommodated a strategic move to raise a stake in Telefónica Deutschland. We are committed to reduce leverage. Meanwhile, Telefónica maintains a solid liquidity position of 20.9 billion euro that, together with a light maturity profile, allows us to cover the next three years. A debt is about 80% linked to fixed rates with an average life of 11.3 years, which places us in a comfortable position to face any market environment. It is to highlight that in January 25, Telefónica completed the refinancing of its main syndicated facility of 5.5 billion euro and extended its maturity to five years with two annual extension options up to a maximum maturity of seven years. Furthermore, we lowered our debt-related interest costs to .32% versus .8% in December last year, thanks to the active refinancing exercise undertaken in previous years, the robust position of fixed interest rates in strong currencies and lower interest rates in Brazilian reais. On slide 16, precast flow. On precast flow, we delivered exactly what we promised last quarter. Q4 saw significant sequential improvement in line with typical historical patterns, plus 68% -on-quarter, driving to a remarkable .1% precast flow growth in 2024, overachieving guidance. In absolute terms, and from what we share with you in November 2023, precast flow has grown by half a billion euro, 25% growth in only 13 months. Levers of this performance has been the solid operations underlying business performance, driven by a strong operation leverage and lower capital intensity. Additionally, we've seen reduced dividend leakage following the Telefónica Deutschland, and we optimized financial items benefiting from FX hedges. Moving to slide 17. At Telefónica, responsible digitization is fundamental to our strategy and operational excellence. We are working to provide greener, more accessible, and trustworthy products and services. In 2024, we have demonstrated our commitment to our net zero targets by reducing our carbon emissions across all scopes, with 89% of our overall electricity now coming from renewable sources. On the social front, we are providing wider coverage for our customers, with mobile broadband reaching 84% of the rural population in Brazil, 95% in Spain, and over 99% in Germany. We have a diverse and motivated workforce, with an employee MPS of 75 and a growing number of women executives. Our governance remains robust, we sustainably embedded across the business and value chain. For example, we have provided anti-corruption training to over 70,000 employees. We have carried out more than 20,000 audits related to sustainability risk, and over 37% of our financing is now linked to sustainability indicators. These efforts have not gone unnoticed. With Telefónica receiving recognition from prestigious organizations, including Time Magazine, Newsweek, and being awarded leading ESG scores for the sector by ISS, ESG, and Bloomberg, among others. I will now hand back to Marc, who will wrap up.

Thank you, Laura. On slide 18, we show our guidance for 2025. As discussed, we will conduct a strategic review that will end during the second half of 2025. We do not want to foreclose any specifics, but it will be in line with what Telefónica is and has been, and will of course focus on our know-how, industry rationale, and will be financially disciplined. In the meantime, we provide you with our 2025 guidance. For the sake of comparability, we decided to guide on unchanged consolidation per limiter as of December 31, 2024, while offering organic guidance to avoid FX distortions. In 2025, we expect organic growth in both revenue EBITDA and EBITDA minus CAPEX. CAPEX intensity to continue declining to less than .5% over sales by year end, and free cash flow generation similar to the posted in 2024, more than enough to pay a 0.3 euro dividend per share and continue the leveraging. While we conduct our strategic review, our priority for 2025 is execution under disciplined capital allocation. So, to recap the key takeaways for the year, in 2024, we delivered on our guidance. As such, we are preparing to adapt to changes in Europe as we announce our 2025 guidance and a dividend of 0.3 euro per share in cash. Spain, Brazil, and Germany maintain momentum in Q4. At the same time, we deliberated on capital allocation, reducing our exposure to a span, strengthening our balance sheet. It is a new time in Europe as we see it, and we will conduct a strategic review to take the most of how out of this new context, review that will be concluded in the second half of the year 2025. We are now ready to take your questions. Thank you.

Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypad. Once again, that is star 1 1 to register a question. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. We will kindly ask you to ask a maximum of two questions per participant. There will be a short silence while questions are being registered. Our first question comes from the line of Andrew Lee from Colnance Access. Please go ahead.

Good morning and welcome to the firm, Mark. I look forward to meeting you. I had two questions, both bigger picture. The first one was just, I guess a few people were a little bit broadsided on the decision to put the midterm guidance on hold today. I wonder if you could just help us understand the decision behind that. Normally what we see is new management comes in and does a strategic review and then adjusts midterm guidance. Did you decide to put the midterm guidance on hold because you don't believe it's achievable? Any help you can give us just in terms of reassuring on the underlying delivery of the firm right now prior to that strategic review would be really helpful. Then second question, there's been, I think you're in the press overnight talking about potential ambitions for broader consolidation across Europe. One of the things that a lot of investors are talking about right now and probably more excited about in the near term is in-market mobile consolidation. Do you see scope for Telefonica's ability to pursue and drive consolidation in any of your markets in the near to medium term? Thank you.

Thank you for your kind welcome and your words. So with regards to your first question, no, we are focusing on the 2025 guidance and not on the midterm guidance. Not because we don't think it's achievable, not because we think there's any changes to what we have said, but to give us the necessary strategic flexibility to go around conducting our strategic review. So let me be very, very clear. Nothing has changed with that regard. But we do see changes in what is going to happen in Europe. And that takes me to your second question. I know you've asked regarding in-market, but on a broader European situation, we see, we believe there are going to be drastic changes in Europe. It is very difficult to announce or to be very specific with regards to the speed at which that is going to happen. And that is something we are going to analyze in our strategic review. With regards to in-market consolidation, we do think there is going to be more flexibility. But at this stage, to be rigorous and specific, I would need to leave it at that.

Okay. Thank you very much. That's helpful.

Thank you. We will now take the next question from the line of Mathieu Robillard from Barclays. Please go ahead.

Yes. Good morning and thank you for the presentation and welcome also from my side to Mark. Mark, thanks for sharing your thoughts, your initial thoughts. And I realized it's very early days, but I was trying to get a bit more detail and nuance and notably based on what you said in your introduction remarks about the priorities. You did mention Spain and Brazil as core businesses and you mentioned the stakes of your presence in Germany and the UK as strategic stakes. I don't know if that's a nuance that you are suggesting something here if you could clarify and more broadly, when you look at the portfolio of assets, what will be the driving elements to assess each market? Is it the scale that you have today and you could have tomorrow? Is it profitable? Is it earning its cost of capital or not? If you could give just a little bit of more detail in terms of the concepts and the driving elements for your analysis. And then I had a question on the precastal guidance for 2025. I just wanted to clarify what was included in that compared to what you had said in the past. And from memory, I think Laura, you had mentioned that in 2025 there was going to be a tax payment to Peru of around 300 million euros. I just wanted to confirm whether that was in the guidance or not anymore. And also, I think you made it clear now that you don't include anything coming from Colombia, but I just wanted to make that super clear. And lastly, if there's any FX hedging for Brazil that is taken into your guidance. Thank you.

Thanks, Mathieu, for your welcome and your four questions. But so there is no nuance and there's no suggestion. We are where we are. We see great opportunities in Europe driven by what is happening and by what I think and we think everybody can read and listen to. And we have, as I was said, saying a very strong position in three very large markets within Europe. And there's no more to that than what I've said. Regarding the driving elements, we are going to conduct a strategic review, but this is something we're announcing today. But I think I can say very clearly that the analysis is going to be driven by operation rationale, by improving our margins, consolidating a market so that scale can give us a better position midterm and long term. We think that, and we're not alone in this, of course, we think that the European market is fragmented and therefore inefficient. And this is different to other markets. We can all see in Asia, in the Middle East, and the US. And we think the winds are changing in that respect. And that is why we're going to conduct our strategic review to analyze that and to be ready for that. Thanks. Laura?

Yes. Thank you, Matilde, for your question. I'm happy to give more clarity. Freecast Flow 2025 guidance is with perimeter equal to 2024, so you can see comparability. Therefore, we have not included the recent impact of the sale of Argentina. We have not included the recent of the Peruvian process, which both happened on Monday. That means we have Peru business as usual. I don't recall guiding on tax payments because we always say, in the case of Peru, we always say timing is uncertain, but I can confirm that in 2024 we have paid 301 million euro of tax contingency in Peru. And whatever we estimate we have to pay in 2025 and 2026 is included in our guidance. Having said that, perimeter is definitely going to change and we will have to give you the proper explanation, but there's going to be more changes. I remind you that Colombia is also for sale and we have to wait for regulatory approval. And then again, timing is uncertain. Argentina, we just did. More deals could come as portfolio optimization in the case of Ispan is not finalized yet and we still need to get the authorization of the process of Peru that we just filed. I also confirmed that the favor filing of Colombia is not included in 2025. We had the positive P&L impact in 2024, but the proceeds are expected to be collected in 2026. And regarding FX hedging, we continue with our strategy, which has proven successful. And I can tell you that by now we have approximately 60% of the Brazilian free cash flow hedge. We have benefited from the more favorable REI FX for the first two months, but now we have hedge approximately 60%. So again, that will be very much shelter. And on top of that, as you know, and I always emphasize, there's a natural hedge on top of this financial hedge. So I hope I provide you enough detail. I'm happy to give you offline more if needed.

Thank you very much. I'm sorry, Mark. I was hoping you were not counting the questions.

Thank you. We will now take the next question from the line of Akil Dattani from JP Morgan. Please go ahead.

Yeah. Hi, good morning. And Mark, welcome to mind as well. I've got two questions if I can, please. Firstly, there was a very interesting interview with you yesterday in the Financial Times, where you talked about some of the themes you've already raised this morning, but I guess more broadly, talking about the tech space. And I guess I was looking to get a few comments from you on that and just to understand better exactly what you're thinking. The comments in the FT, and I don't know how accurate they are, were that your comments were that you felt there was an important role for Europe and Telefonica to play in tech. But you said you wanted to focus in areas that you thought you had natural right to play. So I guess I'd love to understand what you think that is and how you think about it. Obviously, appreciating its early days. And so any comments will be high level. Is this about scaling up Telefonica tech? Is this transformational? Is it just bolt-ons? Any sort of flavor you can give us on that would be super interesting. And then the second one is, again, just referencing back to your comments on solidation. I guess more cross-border than in market. You talked about scale being important. What do you think are the main benefits of bigger players in Europe? You talk a lot about fragmentation, but I guess what do you think being bigger across Europe as a whole really offers? And why do you think that's so important? That would be really interesting as well. Thanks a lot.

Thanks, Akhil. So regarding your first question, what is relevant for us with regards to the conducting of our strategic review is that we're going to focus on areas where we have proven know-how and in markets that we know well or very well. And those would have to do, of course, with telecoms, infrastructure, and areas where we already operate. So we will conduct a strategic review and do not want to foreclose conclusions, but that strategic review is going to be where Telefonica exists and is. There are going to be no market adventures in two areas or technological areas where we do not operate. And at this stage, this is all we can really say, but markets where we operate in means markets where we have clients, where we have revenues, and where we have bidder. With regards to consolidations and advantages that consolidation brings. So I want to be cautious, but it is true that European markets are local markets where has very clear advantages when we're discussing in market. But we think that, and this is something we need to look into very carefully, but we think that having scale, having more investment capacity, having a more solid balance sheet, and having a proper number of clients one can eventually leverage on is an advantage. We're not expecting to discover any sort of chest at the beginning of a rainbow. And with regards to that, there's a lot of know-how in the telecoms market, and we can see what happens when there are large operators in large markets like in the U.S. or elsewhere. So recapping a bit, there are clear advantages in intra-market consolidation, and we think things are going to move in Europe, but before they move, things will be silent also. So that's what we need to concentrate and analyze very carefully. And we think the tendency in Europe or the direction in Europe is to have large European telecom operators, and when that happens, because we think it is going to happen, we want to play a leading role. And here, just referring to my previous answers, always from a discipline, looking into cash, looking into generating cash value for our shareholders, and within areas we know well. Thanks, Akram.

Thank you, Mark. And just one super quick classification on your first answer. When you think about the areas where you said Telefonica has substantial know-how and a right to play, and you think about targeting growth in those areas, do you have any bias in terms of M&A versus organic investments, or is that still undecided?

That's a good question. In this, I am completely agnostic. We're going to look into net present value in every single one of our investments. So it will have to do with opportunity, priorities, but always under a net present value analysis.

Great. Thank you, Mark.

Thank

you.

Thank you. We will now take the next question from the line of David, right from Bank of America.

Oh, hello, guys. I hope you can hear me. I guess it's around the balance sheet. You just said having a strong balance sheet. The leverage metrics you give, I always think it's quite unrepresentative of the way the agencies look at you. I think they add at least a turn with their adjustments. And you talk about deleveraging. There hasn't been any deleveraging 24, or from 2.6 to 2.58 is minimal. You are selling last-time assets at three or so times, which is not making any difference. And you're guarding to no change in free cash flow. So I'm not really sure how this ongoing deleverage accelerates. And your leverage is undoubtedly at the higher end of European telco that is undoubtedly lowering its leverage targets. So I'm wondering how you're thinking about leverage in general, where it should be, and the dividend, which is obviously a year over, about 7%. And your cost of death is only 3%. And that's question number one. And then I guess question number two. Your strategic review could be completed by the end of the year. And I say this with the greatest respect. That seems an awfully long time. Why would it take so long? The assets in the portfolio seem to reasonably define the core assets. Your infrastructure is reasonably defined in terms of what has been sold, et cetera. Spain is well invested. Brazil is in good shape. I'm just wondering why it takes so long. And I hope that question doesn't seem disrespectful. Thank you.

Laura, if you want to go ahead with the first one, I'll answer the second one.

Hello, David. Thank you. Thank you for your question. In terms of deleveraging in 2024, we are very satisfied with the reduction you've seen. It's 0.02. But please take into account that we have included all the purchase of the minority shareholders of Telefonica Deutschland. So if you include that, the deleveraging path has been much more positive. FreeCastlo has very strong growth. I remind you as well the high amount of contingencies we included in Peru in that figure. And FreeCastlo continues being the main deleveraging driver, which is a more structural way to deliver. Having said that, and if we talk about the credit rating agencies, you are absolutely right. They do their own calculations. Those are public. Our improvement in terms of the credit rating calculations are better than the reported ratio we disclosed. It's going to be disclosed pretty soon. We are going to have the meetings with them on the end of this month beginning, sorry, end of March, beginning of April. I think they will welcome our strong FreeCastlo. They will welcome our strong core, non-core strategy, the steps we are taking in portfolio optimization. So we are pretty confident and hopefully you can see that in the reports when those are public. Going forward, on 2025, for the time being, we are setting a target of a stabilized FreeCastlo. You have to look at that in the light of where we started in 2023. So if you look at the growth in those years accumulated is pretty strong. FreeCastlo will continue to be the driver. FreeCastlo is driven by growing operating cash flow on top of the very granular management we do of every single financial line below the operating cash flow. But the sale of assets in Ispan is going to benefit probably more than what you think because you have to take into account that Colombia is a highly levered country. So when that transaction happens, the impact in the leverage is going to help on that For the time being, we are sticking to 2025 targets. The target of the leverage is reduced. The leverage further in 2025. We are absolutely committed to our investment rate and continue reducing the leverage. And for the dividend that you mentioned, we are confirming the 2025 dividend of 30 cents. Everything else will be part of the strategic review that Mark has been referring to. So David, I

think your question with regards to the strategic review is respectful, unfair. And I agree or would agree with you if we announced that it would be ready by the end of 2025 and what I think I said or in any case what I meant is before 2025. We don't want to set a specific date to have the strategic review concluded and to share it appropriately before the teams are finally set and the planning agreed. So the reason we leave it in open is so that we don't artificially put a date that is not the right date. And so the objective is before 2025, before the end of 2025 and if it were by the end of 2025 with the information I have and I think you've made a good analysis, our knowledge today would mean that we've taken a long time.

Thank you, Your Honor. Thank

you. We will now take the next question from the line of Fernando Cordero from Banco Santander. Please go ahead.

Hello, good morning. Thanks for taking my two questions. The first one is for Mark and first of all welcome Mark to the story. My question is also on capital allocation and you have been quite clear on the two factors that would be included in your decisions that would be industrial rationale and financial discipline. In that sense I understand this is still also early days but do you see industrial synergies in order to understand this industrial rationale to increase your exposure to IT services and particularly I'm talking about an asset that you know quite well which is mid-site and also I would like to expand the discussion to not only to services on top of connectivity in the B2B segment but also in the B2C segment and at which extent do you see the current exposure of Telefonica to the media business for example, is also a relevant one in your current portfolio. The second question is for Angel and particularly on Spain. I'm willing to understand a little bit which is your outlook for the OPEC in Spain considering that we have a tailwind cost in 2024 coming from the personal infrastructure and is still having some impact in 2025. I would like to understand first how do you see the whole OPEC at least qualitatively performing and also what kind of revenue growth would you be requiring Spain in order to maintain the ABDA flat. Many thanks.

Thank you for your welcome Fernando. Regarding IT services and what we can say is that you know our strategy well and we will see what our strategic revision concludes with regards to IT services. With regards to mid-site which is an asset I do I think I do know well or very very well. There could be a fit and there couldn't there may not be a fit. It will depend on what our focus is, what our strategic conclusions are. What I can say is that if there is any M&A within the IT sector or whatever sector we will always maintain strategic flexibility to decide in the last moment if that is the right deal or not and it will always look at what the MPV is. So there is no and will be no foregone conclusion after we review our strategy with regards to IT and with regards to all our businesses based on the changes we see that are happening and we think happening in Europe and are going to happen in Europe. And Fernando I would say the same with regards to B2C or any related services. We need with regards to the future we always need to be very very precise and analytical to see where we do actually have know-how not only from a theoretical and strategic point of view but how we bring that know-how down to operations and how we enhance that value specifically. So that would certainly include Telefónica Tech but any potential with regards to B2C we would be very very careful and have to be very sure. But I do have to postpone anything further than these generalities which are very strong and very important to when we conclude our strategic revision.

And thank you Fernando for your second question. The outlook for for Spain that we see for 2025 on revenue we are expecting to sustain -on-year growth slightly above what we've seen in 2024. This will be fostered by retail with growth both on B2C and B2B. On B2C we have the January 25 price increase, we have a very solid mix of conversion KPIs, the output adjourned, the NPS, the net ads are supporting a customer lifetime value which is double the next of competitor hours in B2B. We continue to grow above the market differentially but in contrast wholesale and others will decline. We'll have a decline with the transition of the new wholesale contracts which stabilize and give visibility long term but have a slight deflation. Net-net, the combination of retail and wholesale revenues will result in growth in revenue in Spain again above what we've seen in 2024. Regarding OPEC that you were asking or the translation of this into EBITDA, we're expecting EBITDA to grow by a low single digit above revenue growth in Spain. This is on the back of the revenue trajectory that I spoke about and continuous efficiencies. We still have tailwinds from the right sizing of staff of last year. We have automatization, simplification, the full impact of switching of the copper. So as a result EBITDA margin should be in line with what we had this year. EBITDA which was in the positive territory in the second half of the year, 2024 should grow in full year 2025 and CAPEX wise we continue reducing CAPEX to sales towards the target that we have shared with you. So all in all very supportive outlook for the cash flow generation of our Spanish operation.

Okay, many thanks for the questions. Thank

you. We will now take the next question from the line of Luigi Minerva from HSBC.

Yes, good morning. Thanks for taking my two questions and welcome to Mark also from my side. So the first question is Mark just going back to your comments on the case for cross border consolidation in Europe. As you rightly say European markets are local and I think that's the key hurdle to deliver cross border synergies in case of combinations across markets. I guess my question is from your discussions both at the local government level and perhaps in Brussels. Do you sense appetite from the policy makers for a drastic change to basically going beyond the national markets more towards the single market? I just make a very obvious example, you know spectrum. A spectrum is national and there's always been a very strong resistance from the local countries to give up any sovereignty on spectrum and until that's the case it's very difficult to think about a single market for telecoms and therefore very difficult to think about cross border synergies. And the second question is on Germany and I guess you know what we notice in this quarter is clearly a very strong acceleration of migration of the Einstein's customer, a big step up in Q4. So it would be interesting to see what kind of phasing you expect through the quarters in 2025. Secondly we see ARPU dilution and I think you refer to the family plans and so again if we should extrapolate what we see in Q4 into 2025. And then more generally a comment about competitive dynamics in Germany which clearly seems to deteriorate. Thank you.

Thank you Luigi for your welcome and your questions. I'll answer the first one. So you were asking if do I sense a change regarding drastic change? I would say this is my analysis and the conclusion of my conversation and my reading of the situation is that I would take it further than sense. I would say we detect a determination and I would encourage you and other listeners to use other sources and reach your own conclusions. We detect a determination for drastic change in Europe with regards to strategic autonomy and I would say I agree with the way you share the difficulties ahead with regards to European level consolidation and I agree or I'd say we would agree that those exist and the speed and the level of the execution of that determination is something that we need to see happen. And this is I'd say one of the major issues we need to analyze in our strategic review. But it is my opinion that things have changed drastically to use Luigi your expression with regards to Europe and that strategic autonomy with regards to what is going on in the world with the U.S. with regards to the war in Ukraine and with the strategic importance of what our communications are. There's a lot of people on this call and I would bet a lot of money that every single one of us has a mobile very near us that has all our information exactly where we are who we discuss what our bank accounts are

and

in this context that we think there is going to be change and that before there's a storm in Spain we say that before the storm is the most calm moment and this is the sort of thing we need to analyze very careful in our strategic review.

And regarding your questions on Germany I will make a high level comment initially and then I'll hand over to Marcus to elaborate in more detail with the -on-one migration it's taking place broadly in line with our expectations. We expect it to be completed on time with the Vanessa deadline and on the competitive dynamics in Germany I would like to say that the wholesale contract that was granted by one of our competitors to -on-one changed the dynamics in the market allowing for instance to have players offering something similar to unlimited at very low prices. Last year we also tried to increase more for more movements in the market and it was not followed by other players so we had to adjust. We had to adjust in order to continue having the best mix of value versus price to our customers in Germany. So yes there is more competitive intensity but it should be. It should be. It's a competitive market and we have a very strong asset as I said in my previous presentation we have quality which is improving and exceeding the one-off of our peers in the German market and we are having a very good commercial traction. Marcus if you can elaborate on the details.

Thank you Anshen. I think overall the German market outlook in fixed and mobile is growing for 2025 and clearly it's a segmented market. I think our strategy last year and will also be continued this year is a mix of retail and wholesale. In retail we have been able to add more than 800,000 post-paid net ads and we are now going into all segments so clearly also the APO mix is different so we go from discount into premium segment so clearly the contribution of the segmented approach also allows us to gain this momentum. So overall the segmentation and the mix that we currently see from our perspective is very balanced and we also have been able to add new wholesale partners. So overall to achieve our 2025 target is a very balanced approach between retail and wholesale and clearly by leveraging all segments. So the mix from that instance on the one hand driven by the family of us but on the other side also of a different composition of post-paid cross-ads that we add to the P&L is a natural development.

Thank you very much.

We have time for one last question please.

Thank you. Our last question comes from the line of James Ratzer from New Street Research. Please go ahead.

Yes, good morning. Thank you very much indeed for taking the question. So I would like to add my welcome to Mark as well and add two questions please. The first one, Mark, on your strategic review, I've heard comments about kind of potentially building scale and also deleveraging the balance sheet, you know, which I mean building scale in particular to me could involve potentially more M&A in future. So I was just trying to think about the third element of this which was returns to shareholders. You know, and in particular how you saw that element of the capital allocation over the next say two to three years in particular with asset disposals coming in, do you see the scope for any increase in shareholder distributions above the 0.3 dividend that's already being paid out? And then the second question, maybe this is more one for Laura, but is on the free cash flow guidance you've given for this year. So I was wondering if we could dig into that a bit more specifically because I understand that obviously it's on the same perimeter basis as 2024, but at the same time the facts have changed. You have now sold Argentina and given Peru is in the insolvency proceedings, my understanding is you won't be paying interest on the Peruvian bonds and also you won't be making those tax payments or the extraordinary tax payments in Peru. So therefore I was wondering if you could give us kind of restated guidance for 2025 free cash flow to specifically take into account the known impacts for this year, i.e. Argentina being sold and none of those extraordinary payments in Peru. Thank you.

Thank you James for your welcome. With regards to the strategic review, one of the the I'd say one of the essential elements will be what is our financial strategy that accompanies our strategic conclusions and the financial strategy will have a lot to do with of course capital allocation and dividend distribution and the other elements you mentioned. It is way, way too early for me to share any specifics because we are going to conduct the capital review. What I will say is that I am very, very respectful with regards to our strengths, our history and our way of doing things. We are of course going to continue improving and I come with ambition, but I think I come with a humble ambition and very, very respectful with regards to our financial strategy. So we will continue to work on the financial strategy, our knowledge of the market, our know-how and what is achievable. And within this context we will conduct our strategic review and that will include what our financial strategy is. But unfortunately I can't really say much more at this stage, James.

Hello, yes. As you say, consolidation perimeter is changing as we speak, so guidance will need to be revisited for free cash flow with these impacts. But having said that, let me give you a broad picture that the GEOGRAPHES are as a whole positive cash flow contributors. Some are not, some are and they have been contributing positively in free cash flow prior to contingency. So therefore I touch on that point. For the time being we have included Peru business as usual and as you say if the process we have filed on Monday is authorized we will not be paying in the short term the Sunat payments as you rightly mentioned. There will be other uncertainty related to the business and their filing process. There will be some working capital elements, but we will update you at the due time. Also Argentina has just happened on Monday, I mean literally three days ago. There's going to be probably more portfolio optimization coming, but please take as a whole that free cash flow is positive to neutral contributors prior to contingencies. And in any case let me focus on 2025 from things that are not changing, which is the core businesses. And the core businesses are being very strong in 2024 as you have been in the delivery of the results and the guidance delivery. And that moving part for 2025 we are guiding for growing operating cash flow in organic terms. And that's going to come from the Spain growing a bit down declining capex. Germany is stable a bit down declining capex. Brazil definitely growing operating cash flow. Working capital has been rather neutral in two and to 24 when it usually has a positive contribution. So we should expect a positive contribution in 2025. Lease payments is going to be less effective because there's less increasing value, also lower inflation, interest costs super stable as the case has been. We will continue optimizing taxes. So I'm very aware that Spain brings some uncertainty. We will give you update as soon as this settles because we are we are also in the process of Colombia. Some things may come, but I also want to stress the strength of the core free cash flow as killer and the strength of the other financial items that we will continue managing in the right way.

Thank you. So I mean, it's just thinking about the free cash flow guidance for this year. If Argentina sale is

probably broadly neutral with cash deconsolidated, but some interest payments saved. But I mean, if Peru could be I don't know what you had in the budget for this year, but maybe negative one or 200 million outflow for these tax payments and interest on the bonds there. So does that mean free cash flow could be close to 2.8 billion? You know, if the Peruvian insolvency goes through.

You're asking me for giving you a new guidance. I rather stick to our guidance of 2.6 billion perimeter equal. We haven't provided in the past a detail of every OB in his pan free cash flow, so we are not going to do that at the moment. There will be moving parts and we will update you as soon as we can. And we set the portfolio. We have the authorization of the process in Peru. Many things have to have to happen, but we didn't provide specificities on free cash flow of Argentina or Peru in the past. And we plan to do the same and treat his pan as a whole and revisit the guidance. But please take into account the strong pillars I mentioned on the other part of the business and the neutral to positive impact from his pan as a whole.

But thank you very much.

At this time, no further questions will be taken. Thank

you, everybody, for your warm welcome and questions. We hope that we have provided some useful insights for you. I look forward to our continuing working relationship. Should you still have any further questions, we kindly ask you to contact our investor relations department. Good morning and good Thursday to you all. Thank you.

Telefónica's January, December 2024 results conference call is over. You may now disconnect your line. Thank you.